Refinancing has been challenging for many companies with issuer credit ratings at the low end of the speculative-grade scale over the past 18 months. Some have used creative financing structures to attract new debt capital. Trinseo PLC (CCC+/Negative) provides an interesting case study of creative structuring that helped the firm procure new debt financing to address pending near-term maturities.

However, in our view, the refinancing had a mixed impact on existing lenders and did not fully address the concerns underlying our rating, which was unchanged.

The refinancing completed by subsidiaries of Trinseo enabled the company to repay its $660 million 2024 term loan in full (at par) and $385 million (77%) of its 2025 unsecured notes (also at par). While the refinancing significantly reduced debt maturities over the next 24 months, remaining near-term debt maturities still include the residual $115 million in unsecured notes due in September 2025. In our view, Trinseo may need to refinance these notes before it can reasonably expect to extend its $375 million revolver (undrawn) due in May 2026 or remaining $732 million in term loans due in May 2028. The company also has $447 million in unsecured notes due in May 2029.

More burdensome is that the new debt increases the company's annual cash debt servicing costs more than $75 million (although a payment-in-kind option may lower the increase by roughly $46 million), weighing on Trinseo's free operating cash flow (FOCF, which is marginally negative on a trailing-12-months basis) while its operating results remain weak. Partly as a result, we left our issuer credit rating on Trinseo at 'CCC+' (with a negative outlook) following the refinancing, notwithstanding the improved debt maturity profile.

Getting Creative To Attract New Capital

Proceeds for the refinancing came from a newly issued $1.077 billion third-party term loan borrowed by recently created entities that are not subject to the covenants under its existing debt agreements. Because the borrowers and guarantors are unrestricted entities, Trinseo didn't need to find capacity under its existing debt agreements to incur this debt. It did, however, need to get creative to make the loan terms attractive enough to obtain new funding. This required using various levers under its credit agreement and indentures to provide enhanced protections to new lenders, which correspondingly weakened protections for legacy debt (described more fully below).

Under the new capital structure, lenders for the new $1.077 billion term loan not only have a priority claim (relative to all other debt) to the value of Trinseo's 50% joint venture (JV) interest in its American Styrenics LLC business, but also a pari passu first-lien claim of roughly $948 million against the company's other assets (achieved through an intercompany loan), which ranks equally with those of Trinseo's remaining first-lien debt. As a result, we believe the recovery prospects given default on the newly issued loans are better than those for the remaining first-lien loans (an undrawn $375 million revolving loan and $732 million in term loans due in May 2028), reflecting the more robust collateral package.

One key to implementing this structure involved an asset transfer whereby Trinseo moved its 50% share in American Styrenics into newly created unrestricted subsidiaries. These entities sit outside of the credit group for the existing debt and thus are not subject to the covenants and terms for the credit agreement or indentures. As we understand it, the flexibility to transfer the JV interest primarily relied on the capacity Trinseo calculated under its credit agreement and indentures. However, the value of the transferred assets (from an appraisal commissioned by the company) was greater than the amount available under the baskets in its indentures, so it needed more capacity to complete this step.

To create it, $125 million of the proceeds from the newly issued loan was concurrently transferred to an intermediate parent company that sits above the credit group for Trinseo's legacy debt and then contributed down to Trinseo Holding S.a.r.l. (the credit agreement holding company) in intercompany preferred equity. This $125 million equity injection into the credit group provided incremental capacity to transfer assets under the company's indentures and credit agreement.

Another key element involved lending $948 million of the remaining proceeds from the newly issued loan to the legacy credit group in the form of first-lien intercompany loans. The capacity to add this debt to the credit group under Trinseo's indentures seems to relate to permitted debt provisions, which allow for carve-outs for refinancing plus fixed basket capacity. Under the credit agreement, the capacity for the first-lien intercompany loans appears to primarily relate to the refinancing equivalent debt provisions in section 2.17 (created by the prepayment of the $660 million in 2024 term loans), with additional capacity provided by an incremental equivalent debt basket under section 2.16. We understand that the size of the $680 million in refinancing term loans reflects an original issue discount on this debt, which allowed Trinseo to reduce the capacity used under the incremental equivalent debt provision under the credit agreement.

The resulting intercompany loans are guaranteed by all loan parties on Trinseo's legacy first-lien loans and secured on a pari passu basis by the same collateral. The intercompany loans are, in turn, pledged as collateral to the new third-party lenders, which gives them a claim against the company's legacy assets and further boosts the recovery prospects for the newly issued loans at the unrestricted entities.

On a consolidated basis, the intercompany loans get eliminated, so total debt is relatively unchanged. The debt servicing costs on the intercompany loans effectively offset the debt servicing costs on the newly issued third-party loans, although higher pricing increases consolidated annual cash debt servicing costs by more than $75 million (although a payment-in-kind option may lower the increase by roughly $46 million). Dividends from the transferred JV interests will provide additional restricted payment capacity to pay cash dividends on the intercompany preferred stock (which in turn will cover debt service on another intercompany loan used to fund the preferred stock investment, although neither this loan or the preferred stock need to be paid in cash). Our simplified debt and organizational structure illustrates an overview of the pro forma debt and organizational structure (chart 1).

Chart 1

What Existing Creditors Might Like And Not Like So Much

In our view, existing creditors are likely to view the impact on the credit quality of their investments as mixed. On the positive side:

• The repayment of $1.045 billion of debt at par at a time when the credit rating on Trinseo is 'CCC+' and its secured and unsecured debt were trading below par in 2023. For the company's secured debt, the 2024 term loans hit a low of 93.92 (as a percentage of par) in late May while the 2028 term loans traded at about 80 at that time. For the unsecured debt, the trading prices for the 2025 and 2029 notes hit 73.5 in early May. All trading price data used in this article uses midpoints from IHS' Price Viewer database.
• A less imminent and imposing near term maturity wall due to a significant reduction in debt maturities of $660 million in 2024 and $385 million in 2025. This gives the company more time (and a lower hurdle) to refinance or repay the remaining $115 million in 2025 maturities.
• The company will have more time to improve its operating results (which have been weak since mid-2022, when the post-COVID-19 rebound in demand began to subside and subsequently weakened) and credit profile (table 1).
• Trinseo will have more time to explore the sale of its styrenics business (which includes the JV that it transferred) that may enable it to further reduce debt.

On the less positive side:

• The transfer of its JV interests outside of the credit group and a $288 million increase in secured claims against the credit group (the new secured intercompany loans of $948 million less the repayment of $660 million in 2024 term loans) meaningfully reduced recovery prospects for Trinseo's legacy secured and unsecured debt, in our view. This triggered a downgrade of the legacy secured term loans to 'B-' from 'B', reflecting a revised recovery rating to '2' (with a rounded recovery estimate of 75%) from '1' (95%). Similarly, we lowered ratings on the legacy unsecured notes to 'CCC' from 'CCC+' due to a revised recovery rating to '5' (15%) from '4' (30%). See our research update published Sept. 11, 2023. As we see it, market concerns about these debt instruments are reflected in low trading prices following the refinancing of 82.11 (as a percentage of par) for the 2028 secured term loans, 91.63 for the 2025 unsecured notes, and 52.63 for the 2029 unsecured notes (although low yields for the credit rating are also a factor). These are also midpoints from IHS' Price Viewer database.
• Consolidated annual debt servicing costs increase by more than $75 million due to the higher pricing on the new debt relative to that on the debt repaid (although a payment-in-kind option may lower the increase by roughly $46 million), which will further weigh on already strained FOCF.
• The new lenders benefit from higher pricing on the new loans, notwithstanding enhanced structural benefits supporting the newly issued debt, as well as yield protections against a potential early prepayment over the first 42 months. Yield protections include a make-whole call provision for the first 18 months and call premiums of 103 for the next 12 months and 102 for the following 12 months.
• We expect operating results to remain weak due to soft underlying demand from key end markets, even with pressures from customer destocking expected to fade in the second half of 2023.

Table 1

Related Research

• Trinseo PLC Senior Secured Debt Rating Lowered To 'B-', Senior Unsecured Debt Rating Lowered To 'CCC', Sept. 11, 2023